Wonkbook: The Fed's long national nightmare is finally over

Posted by Ezra Kleinat 07:49 AM ET, 05/18/2012TheWashingtonPost

Are you sitting down? Because you're not going to believe this. The Senate actually got something done yesterday. Something big! They confirmed both Jeremy Stein and Jerome Powell to the Federal Reserve's Board of Governors. That means, for the first time since 2006, there are no vacancies on the Fed's Board.

The U.S. Federal Reserve building is shown.
(Brendan Smialowski - BLOOMBERG)
Stein, a Harvard economics professor, was confirmed 70-24. Powell, a banker who served in George H.W. Bush's Treasury Department, was confirmed 74-21. Neither seems evidently more qualified than Nobel laureate Peter Diamond, who Republicans filibustered last year. But the Obama administration's 'Noah's Ark' strategy -- nominate one Republican and one Democrat -- worked. Furthermore, the predicted collapse of the confirmation process after Obama recess appointed Richard Cordray to the Consumer Financial Protection Bureau hasn't happened. So that's another piece of good news.

The next question is whether Stein and Powell will exert any influence on the Fed, and if so, in what direction. That remains to be seen. Right now, the Federal Reserve seems in the unusual position of admitting that it has missed terribly on its mandate to maintain full employment, swearing that there is more it can do if need be, and yet not doing anything more. Given events in Europe, though, they may not be able to resist escalating for very much longer.

1) The Senate confirmed two nominees to the Fed's Board of Governors. "The Senate on Thursday confirmed two nominees chosen by President Obama for the Federal Reserve Board of Governors, overcoming Republican objections and bringing the seven-member board to full strength for the first time since 2006, before the economic crisis. The Harvard economist Jeremy C. Stein and the investment banker and lawyer Jerome H. Powell were confirmed easily after a morning of debate. The vote for Mr. Stein was 70 to 24, and for Mr. Powell, 74 to 21. Neither has widely known views on the central policy questions facing the Fed: whether to take more action to reduce unemployment or whether the economy is already at risk of a dangerous acceleration of inflation. For months, Senator David Vitter, a Louisiana Republican and a member of the Banking Committee, held up the nominations." John Cushman Jr. in The New York Times.

@philizzo: Senate only took six months to confirm two completely uncontroversial Fed nominees that represented both parties. Hooray?

@justinwolfers: I doubt anyone knows where Powell & Stein are on the hawk/dove spectrum. But both are smart & neither is doctrinaire, which is a good start.

2) The U.S. imposed tariffs on Chinese solar panels. "The United States on Thursday announced the imposition of antidumping tariffs of more than 31 percent on solar panels from China. The move by the Commerce Department is certain to infuriate Chinese officials already upset after recent bilateral frictions over China’s human rights policies and its increasingly confrontational approach toward American allies like the Philippines and Japan. The antidumping decision is among the biggest in American history, covering one of the largest and fastest-growing categories of imports from China, the world’s largest exporter. The department said the United States bought $3.1 billion worth of Chinese solar cells last year, giving China more than half the American market for the devices. Many solar panel installers in the United States have opposed tariffs on Chinese panels, contending that inexpensive imports have helped spur many homeowners and businesses to put solar panels on their rooftops." Keith Bradsher and Diane Cardwell in The New York Times.

@drgrist: Let's get this straight: we're subsidizing coal-industry exports to China and taxing solar-power imports from China? That about right?

3) House Republicans want tax reform in 2013. "As part of a year-end budget deal, House Republicans are urging adoption of 'fast-track procedures' to force lawmakers to complete a sweeping overhaul of the U.S. tax code in 2013...'There is strong support to use the expiration of the [Bush tax cuts] as leverage to force action in 2013 on comprehensive tax reform,' Camp told the Federal Policy Group’s annual tax seminar. 'How? Simple: In addition to extending current low-tax policies originally enacted in 2001 and 2003, we should enact fast-track procedures to compel comprehensive tax reform next year.' Camp said he is mulling what form those procedures might take. He and House Speaker John A. Boehner (R-Ohio), who endorsed the idea this week, made comparisons to the process by which lawmakers adopt trade agreements negotiated with other nations. Under that system, Congress has 90 days to reject or approve a pact in its entirety without amendment." Lori Montgomery in The Washington Post.

4) The Postal Service will begin the first phase of its cost-cutting plan. "The United States Postal Service announced Thursday that it would begin consolidating 48 mail processing centers beginning in July, the first phase of a cost-cutting plan that is intended to save the agency nearly $1.2 billion a year as it tries to adjust to declining mail volume. The agency said it would consolidate an additional 92 processing centers in February, and 89 more in early 2014. In all, the Postal Service said it would close 229 processing centers -- about half of the total -- and it expects to save about $2.1 billion a year after the plan is fully carried out in 2014. About 5,000 workers will be immediately affected by the consolidations, the agency said, though it was unclear if they would be reassigned or given incentives to retire. About 13,000 employees will be affected once the first phase is completed by February. A total of 28,000 positions will be eliminated by 2014." Ron Nixon in The New York Times.

5) Differing approaches to growth will dominate the G8 summit. "There are 4,169 miles between Berlin and Washington. But on economic policy, the two capitals sometimes appear to be on different planets...Chancellor Angela Merkel, her advisers and even much of the German opposition see Europe’s problems in starkly different terms than the Obama administration does. Merkel’s impulse -- to fight debt at all costs to boost investor confidence -- has been at the core of Europe’s crisis response, because industrial powerhouse Germany has been calling the shots. But she has come under heavy criticism from Americans who say her efforts are misplaced. The differing approaches have gained renewed urgency as the crisis flares again in the euro zone, and Europe’s response will probably dominate discussions Friday at the Group of Eight summit at Camp David." Michael Birnbaum in The Washington Post.

Top op-eds

1) MANN AND ORNSTEIN: Our broken political system needs fixes that will work. "Gridlock and political dysfunction. Partisanship at record levels. Attack politics run amok...We’ve all heard the laments -- we’ve made some of them ourselves -- that Washington is broken, that our political system can’t grapple with the nation’s big, long-term problems. So what can be done about it?...Restoring the filibuster to its traditional role of allowing an intense minority to temporarily hold up action in areas of great national moment -- and away from its new use as a regular weapon for obstruction -- should be a top priority. Senate rules should allow only one filibuster on any bill (now there can be two or more). Currently, the burden is on the majority to provide the 60 votes to break a filibuster; instead, the minority party should have to take the floor and hold it via debate, and provide the 41 votes needed to maintain the filibuster." Thomas Mann and Norman Ornstein in The Washington Post.

2) KRUGMAN: The euro's fate doesn't look bright. "Suddenly, it has become easy to see how the euro -- that grand, flawed experiment in monetary union without political union -- could come apart at the seams. We’re not talking about a distant prospect, either. Things could fall apart with stunning speed, in a matter of months, not years. And the costs -- both economic and, arguably even more important, political -- could be huge. This doesn’t have to happen; the euro (or at least most of it) could still be saved. But this will require that European leaders, especially in Germany and at the European Central Bank, start acting very differently from the way they’ve acted these past few years. They need to stop moralizing and deal with reality; they need to stop temporizing and, for once, get ahead of the curve. I wish I could say that I was optimistic...All of us, then, have a big stake in European success -- yet it’s up to the Europeans themselves to deliver that success. The whole world is waiting to see whether they’re up to the task." Paul Krugman in The New York Times.

3) WOLF: If Greece leaves the eurozone the results would be devastating. "The irritation of the eurozone with Greece is at extreme levels. After all, 80 per cent of Greeks say they are in favour of staying in the euro, but then they fail to elect politicians prepared to implement the agreed programme. This drives creditors crazy. Increasingly, the latter are inclined to accept Greek exit, even welcome it. But they should be careful what they wish for. A departure would create severe dangers. The danger of contagion is obvious. The long-run danger is more subtle. But the eurozone either is an irrevocable currency union or it is not. If countries in difficulty leave, it is not. It is then an exceptionally rigid fixed-currency system. That would have two dire results: people would not trust in its survival and the economic benefits of the single currency would largely disappear. These perils are not of concern to the eurozone alone...The risk that a bigger eurozone upheaval would cause a global crisis is real." Martin Wolf in The Financial Times.

4) PEARLSTEIN: The choice is more complicated than austerity or growth. "Fiscal austerity or economic growth? Although it’s not officially on the agenda, that question will dominate the discussions this weekend as political leaders of the world’s largest economies assemble at Camp David...The argument for belt-tightening austerity is that government debt in many countries has climbed so high that it threatens to create a vicious spiral: Higher interest rates beget recessions, which in turn lower government tax revenues and lead lenders to demand even higher interest rates. The inevitable result is default and depression...Where the problem comes in is that too much austerity imposed too quickly risks causing another, similar downward spiral. In this deflationary spiral, overly aggressive tax increases and budget cuts lead to sharp increases in unemployment and decreases in spending and investment, causing tax revenues to fall so much that budget deficits actually go up." Steven Pearlstein in The Washington Post.

5) GAYER AND SWAGEL: Principal reductions won't fix the housing market. "Edward DeMarco, the temporary director of the Federal Housing Finance Agency, continues to endure blistering criticism for refusing to allow Fannie Mae and Freddie Mac to pay for large-scale principal reductions for underwater borrowers (those who owe more than their homes are worth) or to facilitate refinancings for those stuck with high interest rate mortgages. The embattled regulator says he is merely trying to prevent Fannie and Freddie from adding to the more than $190 billion in losses that taxpayers have covered since September 2008...House Democrats have accused him of hiding data purportedly proving that principal reductions would save money and reduce foreclosures...Beating up DeMarco may prove cathartic for policy makers looking to assign blame for economic doldrums. The proposed remedy, however -- having taxpayers pay for principal writedowns and mass refinancings -- would do little to solve the nation’s housing woes." Ted Gayer and Phillip Swagel in Bloomberg.

Top long reads

Jim Tankersley on innovators and inequality: "'We’ve had it backward for the last 30 years,' Hanauer said at the TED conference. 'Rich businesspeople like me don’t create jobs. Rather, they are a consequence of an ecosystemic feedback loop animated by middle-class consumers.' When the middle class thrives, he said, 'businesses grow and hire, and owners profit.' Emerging research from high-powered experts across the ideological spectrum backs that economic inversion. Their work shows how America’s long-term prosperity is in jeopardy because the middle class is struggling and the super-rich are pulling away...It is tempting to view the stagnation of the middle class and the disappearance of middle-skill jobs as a problem for only some of us. That’s simply untrue. Mounting economic evidence suggests strongly that Hanauer’s argument is correct and is, in fact, fundamental to America’s future. It’s not a do-good argument. It is a selfish one, both for innovators and for every other American counting on the innovator class to power growth for decades to come."

Still to come: Jobless claims didn't move; negotiators need to decide on a drug tracking system; House Democrats want to make voting easier; it isn't looking like Keystone XL will be in the highway bill; and a baby just wants to melt your heart by hugging every single goat.

Economy

The eurozone may be ready for a Greek exit. "It is increasingly conceivable that Greece may leave the euro zone, not just because of its own political dysfunction but also because the consequences of such an exit for the rest of the Europe and the global economy no longer seem quite so scary. The foot-dragging and brinkmanship of the last few years have won the other members of the currency union valuable time to prepare for life without Greece. Banks have recorded losses on Greek investments, companies are making contingency plans and Europe has bolstered rescue funds for other vulnerable nations like Portugal, Ireland and Spain. Those measures also have reduced the risks for the United States, making it less likely that a 'Lehman moment' will spread panic through global financial markets. American investment funds and banks have also sharply reduced their investments in Europe." Binyamin Appelbaum in The New York Times.

Jobless claims held steady. "First-time claims for US unemployment insurance held steady at 370,000 last week, tempering some of the recent positive sentiment surrounding the jobs market. Initial claims for jobless benefits in the week ending May 12 remained unchanged from the previous week’s upwardly revised figure of 370,000, according to the US labour department. Claims in the week of May 5 had originally been reported at 367,000...The four-week moving average, which smooths out seasonal factors, stood at 375,000, a decrease of 4,750 from the previous week’s revised average of 379,750...The number of people who continued to receive jobless benefits rose by 18,000 in the week ended May 5 to 3.27m. Aside from last week they are at the lowest level since July 2008...The initial jobless claims data are a reflection of weekly firings and tend to fall as job growth picks up." Anjli Raval in The Financial Times.

Jamie Dimon will testify before the Senate. "JP Morgan Chase CEO Jamie Dimon will be called to testify before the Senate Banking Committee in the coming weeks, the panel’s chairman announced Thursday -- and Dimon plans to accept. Sen. Tim Johnson (D-S.D.) said Dimon - whose firm has been under intense scrutiny after the billions of trading losses it sustained - will be invited to speak before his committee after it holds a pair of hearings on Wall Street oversight...Dimon will agree to appear before the panel, a company spokeswoman said...Johnson said his staff, as well as staffers for Sen. Richard Shelby (R-Ala.), the top Republican on the banking panel, have held briefings with regulators and with JPMorgan in the past week. No date was given for the hearing with Dimon. The two hearings that will be held before the CEO’s appearance will be on May 22 and June 6 and will feature officials from the Securities and Exchange Commission, Commodity Futures Trading Commission, the Federal Reserve and other agencies." Seung Min Kim in Politico.

The SEC is under fire for allowing settlements without admission of wrongdoing. "The Securities and Exchange Commission, which polices corporations, can usually count on support from Democrats and a rougher reception from Republicans. But, on Thursday, the agency found an issue on which its traditional friends are its critics and its traditional critics are its friends. At a House hearing, Republican lawmakers defended the agency against complaints that it lets wrongdoers off the hook too easily when it routinely allows them to settle charges without admitting wrongdoing. Democrats said they were worried that such settlements could send the wrong message, allowing corporations to treat SEC enforcement actions as just another cost of doing business. The issue has become a flash point in the debate over who is to blame for the financial crisis and whether the wrongdoers are being held accountable." David Hilzenrath in The Washington Post.

Some GOP freshmen are bucking the 'no new taxes' pledge. "A small but increasingly vocal group of freshman Republicans are publicly rejecting the idea they are beholden to Grover Norquist’s Americans for Tax Reform pledge for their entire congressional careers. One such member, Scott Rigell of Virginia, has openly rejected the pledge, explaining on his website that it would prevent Congress in some cases from eliminating corporate loopholes or government subsidies because those changes would have to be revenue-neutral. The math, he said, just doesn’t make sense...The tax pledge has long been a litmus test for any conservative who wants to be taken seriously in a Republican primary. That some newcomers are repudiating it lends support to critics who argue the document is more valuable as a campaign tool than a guidepost for governing. Norquist insists he’s not bothered by any hedging on the part of the freshmen...But the slip in devotion, however slight, is notable considering how strong a hold the pledge has had over the GOP." Kate Nocera in Politico.

Two Senators are pushing a bill to tax the capital gains of expatriates. "Two Senate Democrats proposed a law Thursday to set a 30 percent capital gains tax rate for expatriates on all future investment gains in the wake of reports that Facebook’s Eduardo Saverin renounced his American citizenship to skirt taxes on his IPO haul...The move means Saverin is subject to so-called exit taxes in the United States on some of the earlier value of his Facebook holdings, but it will be much less than he would have paid if he remained an American citizen once Facebook had gone public. If Schumer and Casey have their way, though, Saverin and others who have done similarly in the past wouldn't escape so easily. The two Democrats unveiled a bill called the Ex-PATRIOT Act, or the 'Expatriation Prevention by Abolishing Tax-Related Incentives for Offshore Tenancy' Act...If it does pass, it would require Saverin and others who renounce citizenship to pay taxes at a 30 percent rate on any U.S. investment." Tony Romm in Politico.

The FDA user fee bill must resolve differences over a drug tracking system. "Perhaps the biggest piece of unsettled business in the massive Food and Drug Administration user fee bill is whether it will include a national system for tracking drugs -- an effort to combat the menace of counterfeit medications. And the FDA and certain industry stakeholders were still working through key differences Thursday on what the system should look like, according to lobbyists familiar with the negotiations. That raises questions about whether they’ll reach an agreement in time for the user fee legislation the Senate is expected to begin debating next week. If not, it could be added during the House and Senate conference. The Pharmaceutical Distribution Security Alliance, an industry group that includes most of the stakeholders, has put forward a proposal that would require manufacturers to give each lot of drugs an individual serial number. That number could be checked through the whole distribution system against a database to ensure authenticity." Brett Norman in Politico.

Some conservatives are protesting the House GOP's Obamacare replacement plan. "Thirty minutes. That’s the roughly time it took for conservatives to jump all over Speaker John Boehner (R-Ohio) and his leadership team after the GOP’s game plan for dealing with President Barack Obama’s health care law leaked to the media. Their gripe? Republicans would try to replicate popular parts of Obama’s health care law if the Supreme Court overturns the law this summer. Rather than sending out news releases or rushing to cable TV for a rant, conservatives blasted House Republican leadership on a private Google email group called The Repeal Coalition. The group is chock- full of think tank types, some Republican leadership staffers, health care policy staffers and conservative activists, according to sources in the group. The behind-the-scenes fight among Republicans richly illustrates why House GOP leadership is so cautious, sensitive and calculating when it comes to dealing with the conservative right." Jake Sherman in Politico.

@sam_baker: How many times do we need to explain to the world that making insurers cover everyone is very much tied to the mandate?

Domestic Policy

The Justice Department issued rules to stem prison rape. "The Justice Department on Thursday issued the first comprehensive federal rules aimed at 'zero tolerance' for sexual assaults against inmates in prisons, jails and other houses of detention. The regulations, issued after years of discussions among officials and prisoner advocacy groups, address a problem that a new government study finds may afflict one out of every 10 prisoners, more than twice as many as suggested by an earlier survey. Congress passed the Prison Rape Elimination Act in 2003, and the rules to carry it out are the first to address federal, state and local prisons and jails, including institutions holding juveniles. The standards are binding on federal prisons, and states that do not comply could lose 5 percent of their federal financing...The government expects the rules to cost billions of dollars to achieve fully -- perhaps as much as $7 billion, which is less than 1 percent of the system’s overall cost, over the next 15 years, depending on how they are carried out." John Cushman Jr. in The New York Times.

House Democrats introduced legislation to making voting easier. "House Democratic leaders on Thursday introduced legislation to streamline Americans' trips to the polls. The bill is a response to a slew of recent state legislation - some proposed, some already law - setting stricter standards for voters to register or cast a ballot. Supporters of those state efforts -- including new picture ID and proof-of-citizenship requirements - say they're necessary to weed out ineligible voters and maintain the integrity of elections. But critics contend they're designed to suppress eligible voters, particularly minorities and low-income Americans who tend to vote Democratic...At issue are a growing list of state laws recently enacted - usually by Republican lawmakers - in the name of preventing voter fraud. Since the start of 2011, at least 14 states have passed - or are about to pass - new voting restrictions that will affect this year's presidential election...Eight states have passed new photo ID laws - quadrupling the number before 2011." Mike Lillis in The Hill.

A top negotiator said Keystone XL will be dropped from the highway bill. "A senior House Democrat who supports the Keystone XL oil pipeline predicted Thursday that the project will be left on the cutting room floor in House-Senate negotiations over transportation legislation. 'My guess is that it would not be in the final product,' said Rep. Nick Rahall (D-W.Va.), the top Democrat on the House Transportation and Infrastructure Committee. The comments are the latest sign that backers of the pipeline will face hurdles winning its inclusion in the bill to reauthorize popular road and infrastructure programs. The House version of the transportation programs funding bill includes language that approves construction of TransCanada Corp.’s proposed pipeline to bring Canadian oil sands to Gulf Coast refineries. The Senate plan omits it, and bicameral talks are under way to craft a final bill before the current transportation programs authorization expires at the end of June." Ben Geman in The Hill.

@MarkLeibovich: After string of sub-par Starbucks experiences, calling for rise in Cafe Standards....

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